FIN 305 WEEK 4 FINAL TEST 2026
QUESTIONS WITH CORRECT ANSWERS
GRADED A+
◍ Bond P is a premium bond with a 9 percent coupon. Bond D is a 4 percent
coupon bond currently selling at a discount. Both bonds make annual
payments, have a YTM of 6 percent, and have four years to maturity1. What
is the current yield for bond P and bond D?2. If interest rates remain
unchanged, what is the expected capital gains yield over the next year for
bond P and bond D?.
Answer: Bond P:N=4, I/Y=6, PMT=90, FV=1000, PV=?--->1103.951 year
later (1 period closer to maturity)N=3, I/Y=6, PMT=90, FV=1000,
PV=?--->1080.19Change in price=$23.76Current yield=8.15%
(90/1103.95)Cap Gain/Loss= - 2.15% (23.76/1103.95)Total Return =
6%Bond D:N=4, I/Y=6, PMT=40, FV=1000, PV=?--->930.701 year
later:N=3, I/Y=6, PMT=40, FV=1000, PV=?--->946.54Change in
price=$15.8393Current Yield=4.3%Cap Gain/Loss=1.7%Total
Return=2.6%
◍ 4. Consider a bond with a face value of $1000, YTM of 5%, and coupon rate
of 7%. The bond matures in 5 years. Calculate the value of the bond today,
in one year, and in two years. Calculate the percentage change in the price
of the bond each year. Calculate the current yield each year. What is the
relationship between current yield and percentage price change (capital
gains yield) for bonds?.
Answer: Today: (70/.05)*(1-1/1.05^5)+(1000/(1.05)^5)=1086.6141 year:
(70/.05)*(1-1/1.05^4)+(1000/(1.05)^4)=1070.9267CGY=-1.44%CY=6.44%YTM=5%
(6.44-1.44)2 years: (70/.05)*(1-1/1.05^3)+(1000/(1.05)^3)=1054.53
◍ Seniority.
, Answer: Preference in position over other lenders and debtsIn event of
default, subordinated debt holders must give preference to other specified
creditors. They will be compensated only after specified creditors have been
compensated.
◍ Po Problems.
Answer: Po Problems
◍ Buy stock today will receive D=2, P=100r=.1.
Answer: Po= 102/1.1=92.73
◍ 3. Consider a bond with a face value of $1000, YTM of 5%, and coupon rate
of 4%. The bond matures in 5 years. Calculate the value of the bond today,
in one year, and in two years. Calculate the percentage change in the price
of the bond each year. Calculate the current yield each year. What is the
relationship between current yield and percentage price change (capital
gains yield) for bonds?.
Answer: Bond Value (today) = (40/.05)*(1-1/1.05^5) + 1000/1.05^5 =
$956.71Bond Value (1 year from now) = (40/.05)*(1-1/1.05^4) +
1000/1.05^4 = $964.54Percentage Change (Capital Gains Yield CGY) =
(964.54-956.71)/956.71 = .0082 or .82%Current Yield (year 1) = 40/956.71
= .0418 or 4.18%NOTE: CGY + Current Yield = .82 + 4.18 = 5% =
YTMBond Value (2 years from now) = (40/.05)*(1-1/1.05^3) +
1000/1.05^3 = $972.77CGY = (972.77 - 964.54)/964.54 = .0085 or
.85%Current Yield (year 2) = 40/964.54 = .0415 or 4.15%NOTE: CGY +
Current Yield = .85 + 4.15 = 5% = YTM
◍ Collateral.
Answer: General term that frequently means securities, that are pledged as
security for payment of debt.Collateral trust bonds often involve a pledge of
common stock held by the corporation. However, the term collateral is
commonly used to refer to any asset pledged on a debt.A bond that is
secured by a financial asset - such as stock or other bonds - that is deposited
and held by a trustee for the holders of the bond.If the issuing company were
to default on the debt obligation, the debt holders would receive the
QUESTIONS WITH CORRECT ANSWERS
GRADED A+
◍ Bond P is a premium bond with a 9 percent coupon. Bond D is a 4 percent
coupon bond currently selling at a discount. Both bonds make annual
payments, have a YTM of 6 percent, and have four years to maturity1. What
is the current yield for bond P and bond D?2. If interest rates remain
unchanged, what is the expected capital gains yield over the next year for
bond P and bond D?.
Answer: Bond P:N=4, I/Y=6, PMT=90, FV=1000, PV=?--->1103.951 year
later (1 period closer to maturity)N=3, I/Y=6, PMT=90, FV=1000,
PV=?--->1080.19Change in price=$23.76Current yield=8.15%
(90/1103.95)Cap Gain/Loss= - 2.15% (23.76/1103.95)Total Return =
6%Bond D:N=4, I/Y=6, PMT=40, FV=1000, PV=?--->930.701 year
later:N=3, I/Y=6, PMT=40, FV=1000, PV=?--->946.54Change in
price=$15.8393Current Yield=4.3%Cap Gain/Loss=1.7%Total
Return=2.6%
◍ 4. Consider a bond with a face value of $1000, YTM of 5%, and coupon rate
of 7%. The bond matures in 5 years. Calculate the value of the bond today,
in one year, and in two years. Calculate the percentage change in the price
of the bond each year. Calculate the current yield each year. What is the
relationship between current yield and percentage price change (capital
gains yield) for bonds?.
Answer: Today: (70/.05)*(1-1/1.05^5)+(1000/(1.05)^5)=1086.6141 year:
(70/.05)*(1-1/1.05^4)+(1000/(1.05)^4)=1070.9267CGY=-1.44%CY=6.44%YTM=5%
(6.44-1.44)2 years: (70/.05)*(1-1/1.05^3)+(1000/(1.05)^3)=1054.53
◍ Seniority.
, Answer: Preference in position over other lenders and debtsIn event of
default, subordinated debt holders must give preference to other specified
creditors. They will be compensated only after specified creditors have been
compensated.
◍ Po Problems.
Answer: Po Problems
◍ Buy stock today will receive D=2, P=100r=.1.
Answer: Po= 102/1.1=92.73
◍ 3. Consider a bond with a face value of $1000, YTM of 5%, and coupon rate
of 4%. The bond matures in 5 years. Calculate the value of the bond today,
in one year, and in two years. Calculate the percentage change in the price
of the bond each year. Calculate the current yield each year. What is the
relationship between current yield and percentage price change (capital
gains yield) for bonds?.
Answer: Bond Value (today) = (40/.05)*(1-1/1.05^5) + 1000/1.05^5 =
$956.71Bond Value (1 year from now) = (40/.05)*(1-1/1.05^4) +
1000/1.05^4 = $964.54Percentage Change (Capital Gains Yield CGY) =
(964.54-956.71)/956.71 = .0082 or .82%Current Yield (year 1) = 40/956.71
= .0418 or 4.18%NOTE: CGY + Current Yield = .82 + 4.18 = 5% =
YTMBond Value (2 years from now) = (40/.05)*(1-1/1.05^3) +
1000/1.05^3 = $972.77CGY = (972.77 - 964.54)/964.54 = .0085 or
.85%Current Yield (year 2) = 40/964.54 = .0415 or 4.15%NOTE: CGY +
Current Yield = .85 + 4.15 = 5% = YTM
◍ Collateral.
Answer: General term that frequently means securities, that are pledged as
security for payment of debt.Collateral trust bonds often involve a pledge of
common stock held by the corporation. However, the term collateral is
commonly used to refer to any asset pledged on a debt.A bond that is
secured by a financial asset - such as stock or other bonds - that is deposited
and held by a trustee for the holders of the bond.If the issuing company were
to default on the debt obligation, the debt holders would receive the
